The New Reality of the Twitter Ecosystem

In the past two months, a controversy has broken out between the startup of the moment, Twitter, and its ecosystem.

Some of the company's actions—such as acquiring Tweetie, a mobile client since rebranded as Twitter for the iPhone, and imposing limits on companies building ad-related businesses on Twitter—have thrown developers into a tizzy.

Dozens of tiny startups formed specifically to leverage Twitter are now wondering if they'll be able to get anyone to fund their dreams. Chris Dixon, a New York-based angel investor and founder of VC fund Founder Collective, has been among the most outspoken about Twitter's actions. "Expect investment in ecosystem to drop significantly," he recently tweeted. Later Dixon added: "A bunch of investors told me recently there is no way they'd invest in Twitter ecosystem now."

Dick Costolo, Twitter's chief operating officer, responded by saying, "I'm hearing precisely the opposite. Fortunately, time will soon tell which of us is getting bad information."

Views Across the Board

On seeing this exchange, I e-mailed a dozen top investors to get their take. They agreed to respond on the condition that they remain anonymous. Their perspectives all fell somewhere in between.

Many of them, who had themselves invested in Twitter-related startups, said they were stepping back from the Twitter ecosystem, if only momentarily. They said that while they understood some of the onetime shifts that Twitter has made, and the necessity for the company to make money, its recent moves had given them reason to pause.

Most said they were no longer interested in talking to pure-play Twitter startups. (Fred Wilson, an investor in Twitter itself, made clear in one of his recent blog posts that you can't simply develop stop-gap products for the company's service, because Twitter will end up filling those holes.) There is still interest, however, in startups that are using Twitter as a broad distribution platform and as part of an overall growth strategy.

Here are some of their other comments:

 There may well be opportunities in the current Twitter ecosystem, but investors will need to be even more vigilant about filtering deals.

 Twitter is a small company that can't do much on its own, so there's still room for developers.

 Twitter doesn't have much of a business ecosystem to support venture returns (in the near term).

 Twitter is more of a broad distribution platform for customer acquisition than an investment platform.

 One needs to wait until Twitter becomes profitable before investing in its ecosystem, since that's the point at which the company will likely embrace it.

I've remained fairly ambivalent through this whole controversy—mostly because the gray in my hair tells me that the economic interests of platform owners and the people who develop for them are almost never in sync. From my perspective, those who invest in single-platform companies deserve their fate. I was equally hard on those who focused their investments solely on the Facebook platform, too.

Developers at a Disadvantage

Whether it's Google, Apple, Intel, Microsoft, or even Sony (Playstation), platform owners almost always end up going home with most of the profits. From that perspective, what Twitter is doing isn't so out of step—even though Twitter and its ecosystem are nowhere near a profit machine.

Historically, developers have had much less control over their destiny than platform owners. Take Facebook. It has played the developer community like a fiddle with its recent actions (and ad-hoc changes). And platform owners always play favorites. Intel had Dell, eBay picked PayPal, Facebook chose Zynga.

If there's one criticism I have about Twitter, it's that it has failed to be clear in its communications with developers. The company doesn't have a business ecosystem yet, so until it does, it needs to nurture its developer ecosystem and encourage developers to embed Twitter into their products.

In order to do so, Twitter needs to acknowledge that it's not a media company and instead bill itself as the activity stream for the Web that is open, portable, and malleable. If it can do that, it will be able to take on Facebook in a far more meaningful manner.

Facebook is working hard to spread its social tentacles across the Web. The way Twitter can counter is by using its best weapon—a healthy and happy developer ecosystem.